Why super is still simple

28 Nov 2016

4 min read

Ok, so I’m guessing you may have missed this one like the rest of Australia, but there’s been some changes to superannuation and it’s good to be across them if you want to look like you know your stuff at the next family BBQ.

Fundamentally though, superannuation is still the same tax effective investment vehicle, which has a maximum tax rate of 15% when the relevant rules are followed.

The super changes themselves can largely be categorised into two main themes – changes around contributions, and changes in retirement.

Contribution changes

The changes to contributions don’t take effect until 1 July 2017. From that time, there will be a reduction in the amount that can be contributed annually, and if you have (or are approaching) a total super balance of $1.6 million, an additional restriction on your non-concessional (or after tax) contributions apply. If you have this good problem you may want to speak to a financial adviser to see how they can help make you more money.

Another change which comes through from 1 July 2017 is the annual limit for concessional contributions which falls to $25,000. This limit applies to everyone eligible to make or receive these pre-tax contributions, which generally comprise Super Guarantee (SG) amounts (the contributions your employer makes on your behalf) amounts salary sacrificed to super (additional contributions you make because you have too much money or “you know your stuff” when it comes to super) and, if you’re eligible, personal deductible contributions (google it). If all you receive is the minimum SG required from your employer, then the reduction in annual limits (from $30,000 or $35,000 this year depending on your age) won’t have an impact on you.

But if you also salary sacrifice, you may need to review your arrangements by 1 July 2017 to ensure you don’t inadvertently exceed the cap. Of course, the flip side is that if you aren’t maximising these contributions this year whilst the cap is higher, is there more you can do?

Your concessional contributions are generally taxed within the fund at 15%, however for high income earners there is an additional tax on their contributions making the effective rate 30%. The income threshold at which this extra tax applies has been decreased from $300,000 to $250,000 from 1 July 2017. Even though your concessional contributions are taxed at 30% it is still likely to be beneficial to continue contributing up to the cap as that tax rate would be significantly less than your marginal tax rate.

Up to now, if you were an employee and wanted to make extra concessional contribution you generally had to organise it as salary sacrifice through your employer. However, from 1 July 2017 you will also have the option of making concessional contributions directly to the fund. It will be important to consider which method is most appropriate for you, and for many, salary sacrifice will remain a valid option due to its relative simplicity.

For non-concessional, or after tax contributions, from 1 July 2017 the annual cap will be reduced from its current $180,000 to a lower limit of $100,000. The three-year bring forward provision still applies. What’s the three year bring forward provision I hear you cry. It’s basically a strategy which allows people (usually approaching retirement) to add up to three years’ worth of contributions in one year (provided they were under 65 at the start of the year).

With that limit reducing from 1 July 2017, the question again arises as to what you can do this year? Please note that you’ll need 3 ticks to “do more this year”. So, if you were under 65 (tick/cross) on 1 July 2016 (tick/cross), and you haven’t used the bring forward provision in the last 2 years (tick/cross), you actually have the ability to contribute up to $540,000 of after tax contributions this financial year and give your super a great kick before the limits reduce.

Another change taking effect from 1 July 2017 is that the requirements to be eligible for a tax benefit for making a non-concessional contribution for your spouse have been relaxed. Previously the spouse could earn no more than $13,800 for the contributing spouse to receive the benefit. From 1 July 2017, the receiving spouse can earn up to $40,000.

Changes in retirement

Despite all the talk about changes to super in retirement, there have been no changes to the rules around when you can actually access your super or, if it comes from an accumulation style fund, the way the payments are taxed. The existing rules continue to apply.

First, if you have commenced drawing on your super through a Transition to Retirement (TTR) income stream, or look to commence one from 1 July 2017, from that date, earnings on the assets in your super fund that support that TTR will no longer be tax free. Rather, those earnings in the fund will be taxed at the standard 15% tax rate in super, rather than being tax free in the fund. Remember, there is no change to your personal tax on the amounts you receive from a TTR.

Second, for pensions paid in the ‘retirement phase’, which essentially refers to pensions payable to you after retirement or age 65, there is a limit on how much you can actually start these pensions with. From 1 July 2017, that limit will be $1.6 million. Amounts above that need to stay in accumulation phase, with the earnings on those accumulation amounts continuing to be taxed within the fund at the rate of 15%.

If you don’t have, and don’t expect to ever have a balance in excess of $1.6 million in your super account, these changes won’t impact you, other than if you run a TTR.

One of the major things that these recent super changes have shown is that it’s really important to understand what the changes mean for you. Super, as a concept, remains unchanged. The Government estimates that no more than 4% of the population will be impacted by these changes*.

Whether you are in that 4% or not, it’s always worth talking to a financial adviser just to see how you are paced in terms of your current plans, or if they should change.

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